The Need for a Demand Response Action Plan For Europe

Contributed by:

•Consumer Revenue: In 2012 in the USA, businesses and homeowners earned over 2 billion Euros in direct revenues from Demand Response over and above bill savings and avoided investment - much of this was within the balancing and capacity markets. This source of revenue could also be made available in Europe and would release money into the local economies.

•System benefits: Demand Response offers a number of benefits to the electricity system, including increased efficiency of asset utilization, supporting greater penetration of renewables on the grid, easing capacity issues on distribution networks to facilitate further uptake of distributed generation on congested local networks, reducing the required generator margin and costs of calling on traditional reserve - including the associated environmental benefits. These system benefits could be made available in Europe.

•Increased Efficiency: Demand Response creates a reliable, repeatable and clean source of flexibility. For example in the USA 29.5 GW of demand side resources are under control and available to market participants, lowering the number of peaking plants and increasing efficiency. Canada, Australia, South Korea and Japan also have significant levels of participation. This resource could also become available within European markets.

Europe would require a coordinated and strategic Demand Response Action Plan, lead from the Commission level. The European energy system is set to undergo a profound transformation in the coming decades. The large-scale integration of intermittent renewable sources of energy coupled with the development of the smart grid will necessitate the participation of demand side resources – through Demand Response programs - to balance the grid and act as an intelligent partner to generation.

Establishing appropriate framework conditions in the form of regulation and market structures that enable the demand side to participate effectively in the electricity market is essential for achieving the future low-carbon energy system. The European Commission has stated its strong support for Demand Response and the Energy Efficiency Directive (Art. 15.8) requires that “Member States shall promote access to and participation of Demand Response in balancing, reserves and other system services markets, inter alia by requiring national regulatory authorities […] in close cooperation with demand service providers and consumers, to define technical modalities for participation in these markets.” European governments are also eager to support the idea of Demand Response, in principle, as a means for citizens to benefit directly from Smart Meter rollouts and the Smart Grid.

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Figure 1: DR development in Europe. Source: SEDC

While residential Demand Response may require technological rollout, and public investment in some member states to provide either dynamic pricing and/or aggregated demand side services, Commercial and Industrial Demand Response does not. It is technically and economically viable now. In practical terms this means that hundreds of millions of Euros could be directed toward local economies and support local business (hospitals, schools, hotels, office buildings, industries...) through Demand Response earnings as of today. Yet, the repeated pattern of regulatory barriers stretching across almost the entire European Union is effectively halting the establishment of the programs and the ability of third parties to enter these markets.

The reasons seem to be historical – Demand Response is a form of balancing capacity, but electricity regulation is written assuming generation resources (not demand side resources) will be providing that balancing capacity. This means that tender requirements and documentation are written for power generators, effectively blocking the ability for demand side resources to participate, through requirements designed around power plant limitations and cost benefit for power plant owners.

The SEDC has developed 10 rules for enabling Demand Response participation in the markets, including the wholesale, balancing, reserves and other system services markets. These have been categorized in four stages: 1) Involve consumers 2) Create products 3) Develop measurement and verification requirements 4) Ensure fair payment. These are described briefly below and together they form a four-step process to fully open electricity markets to consumer participation.

It is essential to create market structures which reward and maximize flexibility and capacity resources in a manner, which provides investment stability. The SEDC considers that the capacity markets that were opened up to demand-side resources from 2000 to 2008, are a central factor in the development of the roughly 2 billion Euros Demand Response industry, that flourishes in the United States. This is due to the long-term investment stability provided within the capacity markets, which were designed to enable the new build of flexibility resources. The investment stability within the capacity markets financed the introduction of a wide range of customers to Demand Response, as well as the automation of customer sites. These customers are now prepared to participate in far more sophisticated electricity markets such as the reserves markets, the frequency regulation markets, and the energy markets. However without the investment stability provided through the capacity mechanism this level of growth would not have proved possible.Though capacity markets may not be beneficial in all European Member States the principle remains the same, investment security is vital for the establishment of flexibility resources, which in turn are vital to the integration of renewable resources. Whichever market design is established, be it capacity/flexibility markets or availability payments, this economic fact must be taken into account or the development of flexible resources will remain depressed.

The SEDC would call on the Commission to oversee the coordination of regulatory initiatives and the creation of Demand Response targets at the Member State level. The Energy Efficiency Directive mandates in Article 15.8 “Member States shall ensure that national regulatory authorities encourage demand side resources, such as Demand Response, to participate alongside supply in wholesale and retail markets” yet this is far from the case today; the barriers to Demand Response and to consumer participation in the markets are severe.

Far from achieving equal opportunity for both demand and supply side resources, Demand Response and/or aggregation remain illegal in the majority of European Member States and in the majority of system services and wholesale markets. Basic contractual requirements are missing, basic technical descriptions are neglected and balancing market descriptions arbitrarily favor generation, no matter the potential of national consumer flexibility or system requirements. The end result is that all but the largest industrial consumers are barred from market access despite the positive commercial viability of aggregated Demand Response programs.Timing is crucial. Demand Side Programs form part of a private public partnership. Wind generation is increasing and new back-up generation and grid investments are being planned and implemented. New demand sources are also appearing: server farms, heat pumps, cooling units, and air conditioners. To fully realize the potential of demand side programs, they must be implemented during this phase of the European electricity market development, so that they can be built as an integral part of the new system. Not only are European consumers and businesses being shut out of Smart Grid benefits and losing money, but as unnecessary investments are made – i.e., peaking plants built – part of the potential value of demand side programs, both to European consumers and to the electricity industry, will be lost.

Taking into account the potential benefits of Demand Response and the regulatory barriers in place - clear and objective demand side targets will be required at a European and Member State level to ensure real progress. These should include logical step-by-step strategies for market development of demand side services and programs, measured and verified against well-defined key performance indicators. Only a planned and coordinated effort can hope to overcome the systematic historical barriers to Demand Response. The Commission’s leadership in this process will be essential.

Sources:

This document is derived from the SEDC A Demand Response Action Plan For Europe